Healthy Outlook for Pharma Services

Respondents to the 2011 PharmSource-Pharmaceutical Technology Outsourcing Survey paint a positive picture, but concerns linger under the surface. This article is part of a special issue on Outsourcing.

Bio/pharmaceutical companies are expecting significant growth in their contract-services spending in 2011, but it may not be enough to satisfy service providers. That's the sense we get from the 2011 edition of the PharmSource–Pharmaceutical Technology Outsourcing Survey.

Figure 1 How will your contract-services spending change this year?

Among bio/pharmaceutical company respondents to the survey, 64% indicated that they expect their spending on contract services to increase in 2011 compared with 2010 (see Figure 1); that percentage is up substantially from the 2010 and 2009 surveys. In fact, 44% of respondents expect their spending to grow by 10% or more this year, versus just 36% in the previous two annual surveys. We haven't seen these levels of expected spending growth since the middle of the last decade, which represented a high watermark for the contract-services industry.

Figure 2 What will business be like for your company this year?

Increased activity by bio/pharmaceutical clients is reflected in the responses of the contract-service providers, 80% of whom indicated that they expect 2011 to be "good" or better (see Figure 2) than the previous year. However, that percentage is up only slightly from 2010 results, and there was no increase in the share of respondents expecting 2011 to be "very good" or "extremely good" compared with 2010.

Figure 3 How has 2011 been relative to your expectations?

In spite of this apparent market improvement, contract-service providers were expecting even better. Only 26% of survey respondents rated their 2011 activity as "better than expected," and 34% felt that way a year ago (see Figure 3). Furthermore, 27% of contract-service provider respondents rated 2011 as "worse than expected" compared to 22% who thought things were worse in 2010. It seems that after the blood bath of 2009, service providers had muted expectations for 2010, but the better results for 2010 inflated their expectations for 2011.

Figure 4 Best-performing customer segment

Disappointment among service providers may also reflect where the new business is coming from. Asked which customer segment has performed best, 24% of service providers said that mid-size/specialty bio/pharmaceutical companies have been their best performers, which is double the response received in the 2010 survey (see Figure 4). Both the small and global bio/pharma segments fell from the top performer ranks: in our 2008 survey, 43% of respondents named small bio/pharma companies as their best performing customer segments, but that was down to just 17% in our 2011 survey.

PharmSource's analysis has shown that research and development (R&D) spending by the mid-size bio/pharma companies has continued to grow during the past three years even as spending by small and global bio/pharma companies has dropped. This change is not surprising considering that the mid-size companies have been able to fund their R&D activities out of revenues rather than depending on outside investors.

Also, mid-size companies have not gone through the painful restructuring experienced by larger global bio/pharmaceutical companies. Nevertheless, the overall opportunity of the mid-size pharma segment is not great: there are far fewer mid-size companies than small companies, and the spending per company is a small fraction of what global bio/pharma companies spend.